“Easterlin Paradox:” after a saturation point (around $10,000 per year), national income growth does not lead to an increase in average levels of subjective.

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Presentation on theme: "“Easterlin Paradox:” after a saturation point (around $10,000 per year), national income growth does not lead to an increase in average levels of subjective."— Presentation transcript:

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“Easterlin Paradox:” after a saturation point (around $10,000 per year), national income growth does not lead to an increase in average levels of subjective well- being (SWB) over time (Easterlin, 1974, 2004) There are several explanations for the very weak relationship between money and well-being at high levels of income. Diminishing marginal utility of money (Steedman, 2006) Hedonic treadmill – people adapt to new circumstances relatively completely (Brickman and Campbell, 1971; Frederick and Loewenstein, 1999) Relative comparisons - the benefit people gain from increased consumption is reduced if those with whom they are comparing themselves are able to increase consumption as well (Easterlin, 1973; Layard, 2005) These explanations fail to capture an observation that has been made repeatedly by numerous researchers: far from leading to even temporary negative affect, a significant intentional reduction in consumer goods can, in many cases, lead to stable or even increased utility. Consumption is neither instantaneous nor exclusive. Many objects in our possession can influence utility even if we are not directly consuming them, and those influences may vary over time, sometimes even changing sign. Consumer obligation and counterproductive consumption: can the things we don’t use affect us more than those we do? Rachel Haase and David Courard-Hauri, Environmental Science and Policy Program, Drake University More stuff means more choices. Good thing? Introduction References 1.Botti, S., & Iyengar, S.S. (2004). The Psychological Pleasure and Pain of Choosing: When People Prefer Choosing at the Cost of Subsequent Outcome Satisfaction. Journal of Personality and Social Psychology, 87, Brickman, P., & Campbell, D. (1971). Hedonic relativism and planning the good society, in Apley, M. H. (Ed.), Adaptation- Level Theory: A Symposium (pp ), New York: Academic Press. 3.Easterlin, R. A. (1973). Does Money Buy Happiness? The Public Interest, 30, Easterlin, R. A., (1974). Does Economic Growth Improve the Human Lot? Some Empirical Evidence. in David, P.A. & Reder, M.W. (Eds.), Nations and Households in Economic Growth: Essays in Honor of Moses Abramowitz, New York: Academic Press, Ferraro, R., Pfeffer, J., & Sutton, R. I. (2009). How and Why Theories Matter: A Comment on Felin and Foss. Organization Science, 20, Frank, B., & Schulze, G.G. (2000). Does Economics Make Citizens Corrupt? Journal of Economic Behavior and Organization, 43, Frederick, S., & Loewenstein, G. (1999). Hedonic Adaptation, in Kahneman, D., Diener, E., & Schwartz, N. (Eds.), Scientific Perspectives on Enjoyment, Suffering, and Well-Being, New York: Russell Sage Foundation, Gilovich, T., and Medvec, V.H. (1995). The Experience of Regret: What, When, and Why. Psychological Review, 102, Iyengar, S., & Lepper, M. R. (2002). Choice and Its Consequences: On the Costs and Benefits of Self-Determination, in Tesser, A., Stapel, D.A., Wood, J.V., and Wood, J.V. (Eds.), Self and Motivation: Emerging Psychological Perspectives, Washington, D.C.: American Psychological Association, Layard, R. (2005). Happiness: lessons from a new science, London: Penguin. 11.Schwartz, B. (2004). The Paradox of Choice, New York: HarperCollins. 12.Steedman, I. (2006). Consumption Takes Time: Implications for Economic Theory, New York: Routledge. Abstract Model Discussion Most economic consumption is relatively exclusive in time, as there is only a limited number of activities in which one may engage at a given moment. However, items that we own may affect us in different ways depending upon whether we are using them or not. We introduce a time-based model in which utility is affected both by goods that one is using and by some that one is not, with the non-use utility potentially either positive or negative. We explore the implications of findings from psychology suggesting that excessive choice may lead to negative affect, as well as the effects that optimistic estimates of time available for consumption (“planning fallacy”) have on this model. This extension has implications for explaining observations such as the very low marginal utility of income in post-industrial societies (modified Easterlin Paradox), as well as the counterintuitive success many individuals have reported with voluntary simplicity. Humans are quite poor at estimating future utility, especially when relevant factors are not made salient, and this is likely to lead to overconsumption of durable goods. People may rapidly adapt to a new item, such that it provides little to no additional utility over time (Schwartz, 2004). People may become bored with an item, or it may undergo an apparent utility decline due to rapid obsolescence. A negative γ might be largely constant in time. This would be the case if an unused item continued to produce psychic disbenefit. Regret may also be experienced due to having purchased an item so prone to obsolescence. During purchasing decisions, merchants have a significant incentive to make salient potentially positive γ, while obscuring the potential for negative γ. The utility of using an item is stressed, while potential time conflicts are minimized. During planning, we tend to imagine that our total time available, T, is larger than it actually is (planning paradox). In this case, the T considered in purchasing decisions is greater than the T experienced during consumption. In our model, this leads to greater utility loss than would be expected if the only cost were the misallocation of money. If we think that we are going to have more time than we will have in reality, then the purchase of things that we won’t actually have time to use will actually decrease our overall utility. Consumption is not instantaneous, and we often think about things that we are not doing while we are in the process of using a particular consumer item. In many cases, these thoughts question whether we could or should be engaging in an alternate activity. Because of various potential errors in our ability to estimate utility stability, time availability, and disbenefits from lack of use, negative affect has the potential to build up to a point where it leads to a significant and unpredicted utility decline. Our work suggests that this effect may contribute to the rapid decline in marginal utility with high levels of consumption, as well as the lack of utility decline reported during intentional simplification. Many of the reasons why we would expect negative utility from an unused item are well-studied, but it is difficult to quantify this value for individual items, let alone the full range of for all items one owns under all circumstances. This difficulty extends to consumers, and complicates their choices in ways not currently discussed in the economics literature. Economic models do not simply represent an external, independent reality, but they can become internalized and produce behavior changes both in those who study them (Frank and Schulze, 2000), and in the culture at large (Ferraro, Pfeffer, and Sutton, 2009). There is a danger in ignoring effects of items not being used simply because these effects are difficult to quantify, because this disregard may reduce the salience of this disbenefit during consumption decisions. There are similar dangers in the disregard of time constraints, which are likely to be as binding upon actual consumption in post-industrial economies as are income constraints. An increase in the number of choices can actually reduce satisfaction with the item that is finally chosen (Botti and Iyengar, 2002). Extensive choices may be initially appealing to decision-makers, but they negatively affect both satisfaction with their choices and their motivation to choose. This suggests that the potential for increased goods (availability of consumption) may encourage individuals to purchase items, but the actual experience of having a large amount of goods may be overwhelming, or at least produce more disbenefit than expected. Having more options increases the responsibility choosers feel for their decision, making the process more frustrating and the result less satisfying. The presence of multiple choices can actually lead to a reduction of utility during the use of a given item. People worry about the potential for regret over a poor choice (Gilovich and Medvec, 1995), leading to more effort in choice trade-offs than would be expected from a simple optimization of a utility and time equation, and the effort increases with number of choices. Trade-offs detract from the satisfaction of a decision because they emphasize what a choice lacks and the other opportunities one must pass up in making that choice. (Schwartz, 2004; Iyengar and Lepper, 2002). Misestimation, regret, and salience Effect of time